While the Goods and services tax was to lower the tax incidence on agriculture commodities — most unprocessed food is exempt from GST — it hasn’t.
While the Goods and services tax was to lower the tax incidence on agriculture commodities — most unprocessed food is exempt from GST — it hasn’t. This is because many states have hiked mandi fees/assorted other imposts and approved sharp increases in the commissions payable to arhatiyas (market intermediaries), inflating food prices to the consumers. These local levies,which vary from state to state, also impede movement of agriculture produce across state borders, jacking up costs further.
After recent hikes, arhatiya commissions are exorbitantly high in many markets — 10% in Maharashtra’s Vashi market and 7% in Gujarat (Vadodara) for fruits and vegetables (F&Vs), for instance,— and along with other taxes, are up to 11% of the mandi (purchase) prices.
Traders said that aggregators who bring the produce to large mandis also charge 5-10% depending on the volume of trade, so the actual tax incidence on the goods could be even higher.
Punjab increased the market fee as well as the rural development cess to 3% each from 2% in September last year, taking the total incidentals (including arthia commission) to 8.5% for food grains and 11% for fruits and vegetables. The hike, approved by the Centre, came into effect soon after a 2% infrastructure development cess was subsumed in GST.
The arthia commission on F&Vs in major producing states of Maharashtra, Himachal Pradesh, Jammu and Kashmir, West Bengal and Karnataka ranges 5-10% (see chart). In Delhi, India’s largest F&V trading hub, the commission agents charge 6%.
The minimum support prices — which have seen sharp hikes for kharif 2018 crops — also increase the prices of farm goods (at least in case of rice and wheat which are actually procured by the designated agencies). While MSPs benefit farmers too, the local levies and arthia fees don’t.
Sanjay Kaul, MD & CEO of National Collateral Management Services, said: “The introduction of GST has significantly eased the movement of goods across the country for a large number of commodities, materials and equipment. However, the movement of agricultural produce across state borders continues to face hurdles due to the continuation of several states taxes and levies as only the purchase tax and VAT have been subsumed in GST. Specifically, mandi cesses, arthias’ commission continue to be collected and the major difficulty is the wide variance of these levies across various states, with Punjab, Haryana and AP having the highest taxes/cess.”
Given the state governments’ reluctance to reform the agriculture trade that impedes the efforts to empower farmers with easy access to buyers outside their states and freedom from exploitative middlemen, the Centre is evaluating a proposal to bring marketing of farm goods under the Constitution’s Concurrent List, so that it has greater say on the relevant regulations and taxation. A key objective of the change is to weed out sundry state-level taxes that inflate the cost of farm goods procurement by the government and private traders, even as the farmers get less-than-remunerative prices.
Although retail food inflation moderated by almost 20 basis points sequentially in June to 2.91%, a rise in prices of some farm items so far this month and the announcement of high MSPs for certain crops could weigh on food inflation in the coming months.
“A host of agricultural commodities is exempt from GST. One way of creating a uniform tax structure would be to have the GST Council introduce a nominal GST on agricultural commodities, including on the exempted list, with one important condition that all the states agree to have the mandi fee, arthia commission as well as all other local levies subsumed within the GST. This would remove all impediments to free movement of agricultural commodities which should also be accompanied by a major reform to introduce pan-India trading/mandi licences,” Kaul said.
“The launch of electronic national agricultural market (eNAM )was aimed at reducing the role of middlemen in the supply chain of agricultural produce between farmers and consumers. However, the absence of a logistic chain has hampered the growth of the electronic market place,” said a government official. The government is working with private sector to establish a network that will help in transporting agricultural goods from one place to another while ensuring the quality of the products, he added.
“Market interventions by the state governments need to be aligned with the one-nation-one-market concept by laying greater emphasis on long-term connectivity for agricultural produce, across states and geographies,” the Ashok Dalwai committee on doubling farmers’ income has said in its report. The panel also recommended that agricultural marketing be brought under the Concurrent List.
“Since the government will soon come out with schemes that will protect farmers against fall in market prices and will ensure that they do receive the minimum support prices, the expenditure of the Centre will be reduced if the incidentals are lowered. As for the fees levied and fruits and vegetables, states can do away with them particularly when prices of any particular produce goes up, said the official quoted above.